Sunday, January 29, 2017

Scientists are and will be an important part of the resistance against Trump, Brexit, Le Pen and the other national-populists that are trying to erode democracy and a universalistic ethic. We know about the hate that Trump feels towards scientists. Colin Talbot reports about the consequences of Brexit for scientists, especially for European academics living in the UK. As a European who was very happy doing research in the UK between 1999 and 2002, I find this very sad. Scientists resisting national-populsim deserve all our support. The article by Talbot concludes with these parapgraphs: "Our global status isn’t of course just dependent on EU academics – UK experts are our bedrock (70%) – but the other 30% that come from the EU and the rest of the world are an important part of our global status. Losing this talent – whether through demoralization or deliberate design – would have catastrophic effects. As Brian Cox puts it “Ministers must consider our global reputation before uttering platitudinous sound-bites for domestic consumption, and think much more carefully about how to ensure that the UK remains the best place in the world to educate and to be educated. UK Universities are everything the government claims it wants our country to become; a model for a global future.” He added “the current rhetoric is the absolute opposite of what is required. The UK appears, from outside, to be increasingly unwelcoming and backward looking”.” They should be even more careful about the policies they enact and the way they are implemented.
The Home Office’s at best clumsy, at worse malicious, handling of residency claims is causing huge distress and damage to our reputation. I am already hearing cases of EU nationals leaving, or planning to leave, because of the uncertain and unwelcoming future they now face. One academic lawyer I know of has already moved. We don’t know what the eventual outcome will be and how many EU academics we’ll lose now, or in the future, as a result of all this."

Saturday, January 28, 2017

There is a nice article by Jared Diamond discussing the work of Acemoglu and his authors (AJR) and the work of Putterman and his coauthors (CCP). The theory of the reversal of fortunes that the former thought that applied to countries as geographic units, the latter proved that actually did not apply to populations. That is, the fact that countries that were richer in 1500 are today poorer does not mean that the related populations have become poorer. Today the USA is richer than Peru not because the Inca have declined and the Apache have rised, but because the Apache were basically replaced by well endowed European populations that have been richer all along. Diamond does a very good job at summarizing the work of this two sets of authors, and at discussing more generally the difficulties of operationalizing vague concepts in social sciences. It shows also some skepticism about institutional theories, for example by saying that Argentina is today richer than Costa Rica in spite of having worse institutions because Argentina's geography has accommodated much better the crops and domestic animals that Europeans brought with them. He finishes the article by saying this:

"I should make clear, however, that my overall assessment of AJR’s and CCP’s work is an admiring assessment and not a negative one. When one deals with big, complicated, multidetermined subjects such as economic history, it is unlikely that first scholarly treatments will discover the whole answer and identify all determining factors. Instead, one usually has to begin by identifying a few major factors, investigate whether those postulated factors are correct, and then see what still remains unexplained, before one can hope to identify further factors. AJR succeeded convincingly in formulating a problem and in demonstrating the explanatory roles of some factors. CCP have now extended AJR’s work by identifying further factors. That still does not give us a complete understanding of economic history. It remains a challenging problem, requiring much more research, for social scientists to disentangle the contributions of each of the elements of cultural and biological baggage to national wealth."

Friday, January 27, 2017

I will be working in the next few months on a revision of my paper on behavioral regulatory agencies, to be presented at a promising meeting about organizational and institutional economics in May in Corsica. Contrary to some neo-Austrian or neo-Public Choice approaches, I do not believe that the bounded rationality of regulators implies a presumption in favor of deregulation. I agree with these neo-Hayekians that traditional neoclassical economics has excessive faith in technical fixes designed by experts to de-bias ordinary citizens and maximize social welfare at the same time. Notice that these de-biasers should be ultra-clever: they have to help citizens maximize their individual welfare and in addition correct market failures (two separate and challenging tasks). Of course expert bias challenges this faith in the traditional regulator. However, expert bias is just one source of bounded rationality. It may come in a variety of forms: action bias, over-confidence, tunnel vision, availability bias... However, there are at least two other sources of bounded rationality for regulators: non-optimizing behavior and non-standard preferences. First, regulators and policy-makers may behave more in a satisficing way rather than in a maximizing way, as we know since the times of Herbert Simon. As a result of that, administrations have routines that only become altered when shocking events happen. This may be a corrective on self-interested regulators that may be tempted by capture or other rational but not necessarily welfare-maximizing decisions. Secondly, regulators may have intrinsic preferences or be under the influence of social norms, and their constituencies or stakeholders may value fair processes and acts of communication. To use an expression previously used by Elinor Olstrom and others, regulators may also be "better than rational." Perhaps that is why Shiller and Akerlof in their book "Phishing for Phools" argue that many regulators are not captured by industry because they have an intrinsic preference for doing their job well, or that is why Akerlof at a recent talk in Madrid about water regulation argued that narratives could be useful to convince voters-consumers-citizens that water conservation and quality in water are valuable. The outcome of all this mixture of sources of bounded rationality may be better or worse than the technical regulation expected by neo-classical economists, but we should not necessarily conclude that the normative prescription should be in general less regulation.

Monday, January 23, 2017

Here is a lesson about democracy by one of the greatest progressive intellectuals, Amartya Sen (people that consider themselves progressives and that dispute the democratic credentials of those like myself that question the idea of self-determination referenda in XXI century democracies should pay attention), in a dialogue with Will Hutton about the reedition of his book on collective choice:"How would you have designed the referendum so it
did not produce what you believe to be a frivolous outcome?
I don’t think a referendum is the way of dealing with it. Referendums are a bit
like public opinion polls – you do them, sometimes they’re very wrong. I think
the best person to read on that is John Stuart Mill, namely his book Considerations
on Representative Government. Why is representative government rather than
decision by one-shot referendum the right way of dealing with issues? These are
complex questions and you need a whole lot of engagement. It isn’t that you
have elections once in four or five years and then democracy goes away and you
already decided everything in the election... there is a continuing need to
think and debate.

For example, austerity wasn’t a part of proposed policy when Cameron won
the election but it came in. Now, in this case I believe he made a mistake in
moving in that direction, but he didn’t make the mistake on grounds that it
wasn’t in the party platform. A representative government gives you the freedom
to think about taking into account everything. In this case I believe he made a
mistake. But on the other hand he didn’t make a mistake in thinking that since
austerity was not OK’d by the voters, it could not be allowed to be thought of.
You are in a parliament, you have to think about it, these are important issues
to consider.

Referenda are a good way of catching the attention of people, but that has
to be followed up by really serious engagement in arguments in parliament and
newspapers. There’s also the issue of bias of the media; there are certain
types of argument that don’t get the kind of attention that they should get.
But if we had had a vigorous public debate inside and outside parliament and
with each other and then arrived at some kind of a conclusion in parliament,
then that would be something which I would regard to be not frivolous. But to
do it out of a one-shot sudden decision?"

There is much more in the interview, and there should be much more in the expanded version of the book, which I already bought on-line.

Saturday, January 21, 2017

The new US president has buried the hope (or the myth) of a liberal and civilized nationalism. In the integrated world of 2017, the solution that Trump proposes to Rodrik's trilemma is the de facto elimination of democracy and its replacement by a combination of twitter, bullying and olygarchic government. A nation-state dominated by big protectionist business men that do not care about global problems will operate in a global war somehow trying to manage it and keep it under control with other olygarchs in other nation-states. Those that try to build alternatives, based on federalism, trade and cooperation are now the enemies. It was symtomatic that in a theater play about the federalist founding father Alexander Hamilton, the actors and actresses stopped the play in front of Trump's number two to tell him that they were against bigotry and intolerance, all of them values that are in strong contradiction to the path of progress that the federalists tried to establish with their system of checks, balances and multi-level democracy. The only hope (if they want to rebuild a world of sovereign nation-states) now of nationalists that still pretend to be in favor of free trade and liberalism (like Theresa May or many Catalan secessionists) is a bigot ignorant isolationist in the White House that has made clear from day one that doesn't want to know anything about free trade. The ideas of federalism offer an alternative, globally and internally in the US, as argued in a recent article by Laura Tyson and Lenny Mendonça: "the US Constitution allows individual states to function as what Judge Brandeis called laboratories of democracy by experimenting with innovative policies without putting the rest of the country at risk. There is a long and rich history of successful experiments. State and local governments were leaders in establishing public primary and secondary education systems, as well as state colleges and universities. California, Wyoming, and other states allowed women to vote – an example that encouraged passage of the Nineteenth Amendment (enfranchising all adult women). Welfare-to-work programs in Michigan and Wisconsin served as the model for federal welfare reform under President Bill Clinton, and Obamacare is based on Massachusetts’ health-care system, introduced under Republican Governor Mitt Romney. Likewise, from 2000 to 2014, by enacting a variety of energy policies – from broad climate action plans to mandated renewable-energy standards – 33 states cut carbon dioxide emissions while expanding their economies. More recently, some states have introduced cap-and-trade systems to put a price on carbon, and many are already on track to meet Obama’s Clean Power Plan targets. Half of all US states have now legalized marijuana in some form, with eight embracing full legalization. Three states have implemented laws offering paid family leave, with a fourth on the way. Nineteen states rang in 2017 with increases in their minimum wage."

Sunday, January 15, 2017

After writing "Moneyball" (which would inspire a great movie with Brad Pitt as manager of a baseball team), Michael Lewis knew from a review by economist Thaler and legal scholar Sunstein (authors of "Nudge"), that the biases that plagued the work of traditional baseball scouts and managers were just an example of a more general phenomenon that had been studied by Israelian psychologists Amos Tversky and Daniel Kahneman. The latter won the Nobel Prize in Economics in 2002, which would have been shared by his friend and co-author had he not died some years before, in 1996. He would also write the very successful book "Thinking, Fast and Slow." As a consequence of later paying more attention to Kahneman and Tversky, and of personally knowing the former, Michael Lewis has now published "The Undoing Project," about the lives and work of the two great psychologists and their close and eventually problematic personal and professional relationship. The book contains a valuable summary of their theories. To lecturers it is useful to have new ways of explaining things to a broader public (or to undergraduate students). For example, a good way to summarize their thoughts (especially Kahneman's) is that individuals care not only about money and material rewards, but also about emotions related to outcomes. Tim Harford in the Financial Times has praised the book, but expressed surprise that the first chapter is devoted exclusively to biases in basketball at the NBA with no mention of the two star pshychologists until the very end. Perhaps Michael Lewis had another Moneyball story but now about the Houston Rockets in basketball instead of the Oakland A's in baseball, but thought that the NBA story was not enough for a single piece. But then given the exagerated role that basketball plays in the book, perhaps Lewis could have done more to discuss the important contribution that Tversky made to the study of basketball: the "hot hand" phenomenon. For many years, a study by the late psychologist introduced among statisticians the idea that the "hot hand" really did not exist, but it was just a misinterpretation of a possible realization of a collection of random events. However, more recent work with more sophisticated statistical techniques has questioned the work by Tversky and others on this, and it seems that there could be reasons having to do with self-confidence and coordination that justify the existence of serial correlation among the shots of an individual player during a game. Although of course we are very bad at interpreting random events, the "hot hand" phenomenon is far from settled. Of course Lewis does not have time and space to discuss all the subtleties of scholarly work and debate. But perhaps those areas or characters that he emphasizes should be discussed more in depth. For example, Lewis stresses the role of Thaler among economists and Sunstein among legal scholars (and in the administration as "regulatory czar" with Obama) as promoters of the unorthodox ideas of Kahneman and Tversky. He also discusses the relationship between the two Israeli psychologists with an American psychologist, Paul Slovic, an expert in expert bias. Then, it is surprising that Lewis does not mention the controversy between Slovic (among others) and Sunstein, a great defender of the role of insulated expert agencies in the public sector. The book is very enjoyable nevertheless and will surely be very successful. The seller at the shop in Heathrow Airport (I was in transit) where I bought my copy had no doubt about it: "do you know "Nudge" and "Thinking Fast and Slow"? Then you'll like this!"

Thursday, January 12, 2017

As David Autor explains very well in this TED talk, jobs will not disappear with technological change. Instead, there will be more of them. But rapid changes in labor markets due to robotization and globalization are disruptive for millions of workers especially in relatively developed countries. The rise of global multinationals that manage data offer opportunities to young entrepreneurs and globalized workers, but of course pose enormous challenges for ordinary people. Globalization is here to stay, and is actually responsible for many good things that we have (this blog... my apologies for being self-centered). But it changes our life and changes the content of the optimal policies in areas like labor institutions or fiscal policies, which now have what economists would call enormous cross-border externalities. We cannot debate labor market policies as if workers were still mostly in factories, and we cannot debate fiscal policies to have a decent level of revenues to finance welfare policies as if nation-states had still the monopoly of sovereignty. Of course they are still relevant, and they should be especially if we have nothing in place to replace some of their functions. But in Europe we do have something in place, the European Union, thanks to which we have human rights, free movement and money out of the ATM's. Without supranational policies it is going to be impossible to stop tax competition (or regulatory competition in for example lowering minimum wages) or to coordinate policies to fight climate change that will destroy the life of billions of workers if nothing is done in the present and the immediate future. Without large democratic aggregates organized in successive rings of federalism, it is going to be impossible to contain financial instability, and it is going to be impossible to manage migrants and refugees. Those theoretically progressive leaders that are agnostic about nationalist movements should think twice. When socialist leaders, with a few honourable exceptions like Jean Jaurès, embraced nationalism in the first world war, they opened the door to the catastrophes that destroyed the lives of millions of working families across Europe in the next years and decades (including the second world war). Union leaders that do not raise their voice to fight national-populists in Catalonia, Scotland, Bavaria, Northern Italy, England or the Netherlands are useful idiots that should remember what happened to the left in places like Israel or Ireland once they became identity prisons.

Sunday, January 8, 2017

I finished reading these days the impressive book in French by Jean Tirole "Économie du Bien Comun." He explains the results of his research in the last decades, on regulation (which is his original topic) but more broadly and perhaps interestingly on behavioral economics, Europe, climate change or the labour market. It is the chronicle of a desperate appeal to change our institutions to better take into account the general interest, or as he would say to better align the individual interest (of human beings, organizations or states) to the social (global) interest. There is a very interesting paragraph
on the loss of relevance of even the French state (p. 219):

"In the last
thirty years, there has been a double loss of influence of the jacobin French
state:

-To the
benefit of the market as a result of privatizations, of the opening to
competition, of globalization and of the more systematic use of auctions and
bidding systems;

-And to the
benefit of new actors, either of a political nature –Europe and the regions- or
otherwise –judicialization and creation of independent authorities."

My only criticism of the book is that Tirole does not envision any role for
the state as company owner. That is questionable in a normative sense (surely there must be some conditions under which arm's-length regulation becomes difficult because of transaction costs or some other reason), but it is blind in a positive sense, because state-owned firms seem to be here to stay. You don't need to look at China, you can start by looking at France itself, but you can look at China if you want.

The message of the book is clear in my view: there are so many changes in the way the economy works as a result of technological change and globalization, that we cannot afford the risk of leaving institutions as they are now, or of individual or nation-state laissez-faire. We should manage
globalization better and not because there is necessarily a correlation with the rise of
national-populism (perhaps there is not: the book "Globalization and its discontents" by Stiglitz was published in 2002, when Brexit and Trump were not in the political radar). As a speaker said in the WEAI conference that I attended in Santiago this week, human globalization
started with the Homo Sapiens taking over the Neanderthals. Has the white
(South and North) American man any moral authority to say that immigration
should be stopped? When one sees Trump or Pinochet, one certainly has doubts
that unselected migration yields good returns (good descendants of immigrants)
in the long run but no, I don't believe that globalization can or should be stopped. We should manage it better because our institutions evolved to be fit in another era.

To me the
big politico-economic questions of today remain 1) how to answer Rodrik’s trilemma (actually a dilemma when one realizes that globalization is
unstoppable: it is, perhaps Trump is a nativist but he won with a
decisive help from a foreign power, as Pinochet became a brutal dictator because of another foreign power…) and 2) what are the main causes of
national-populism (because we should stop it if we are to make progress towards a better world). There are no easy answers.

Monday, January 2, 2017

Chile (I'm spending some days here) is a unitary country that is geographicaĺly relatively isolated, and it has been successful in developing stable institutions and a good economic performance (not perfect, inequality is still way too high). I thought that being a relatively successful geographically isolated centralized and unitary country, if I can argue that if even Chile can take advantage of federalist ideas, then any country would benefit from them.
Let's try.
By modern federalism I understand a multi-level democracy where no single level has the monopoly of sovereignty, because of the obsolescence of the nation-state. Accepting this idea would be a severe blow to the Chilean military, but perhaps it would be good for everybody else (even for some generals with an open, international and professional mind). Members of Parliament in Chile are now considering the democratic election of regional powers. Regions already have some powers, but regional presidents are appointed by the central government, not a characteristic of a multi-level democracy. As the size and complexity of government has increased in the recent decades, apparently politicians are finding it interesting to discuss the possibility of applying the subsidiarity principle to their arrangements. Of course it is no panacea, and they should make sure that new democratic powers use their budgets not to undermine the whole system but to strengthen it. Chile has an increasingly conflictive Mapuche problem and an old general problem of racial discrimination; ideas form how federal countries deal with cultural and linguistic diversity can be of help here. They also have a territorial dispute with Bolivia, which would become a lesser problem if South America or Latin America became more integrated. A good sign is that some of the big private corporations that are so important in Chile agree with this orientation: the national airline LAN-Chile (LAN meaning National Airlines) has now become LATAM (for Latin America I guess) after a series of acquisitions. And by their own choice the Chileans live in a very open globalized economy, and therefore all the problems and challenges (in the labour market, the tax system or climate change) that apply to the obsolsence of the nation-state in the times of the Internet and big data also apply to them. The argument seems to work. Then it works for any country.